Author: Pratyush Mahapatra, Law Student at L.R. Law College, Sambalpur University

Edited by: Sushmana Pandey, Law Student at Amity University  

1. ABSTRACT

The B & T AG vs Ministry of Defence case was a contractual disagreement over the purchase of 1,568 submachine guns. After signing the contract in 2012, problems emerged in 2016 with the Ministry’s encashment of the warranty bond and liquidated damages. B & T AG disputed these actions and requested arbitration under Section 11(6) of the Arbitration and Conciliation Act of 1996. On May 18, 2023, the Hon’ble Supreme Court held that such an agreement does not extend the limitation period, which is controlled by Article 137 of the Limitation Act of 1963, which establishes a three-year time limitation from the cause of action. The court emphasized the respect of procedural time frames and rejected B & T AG’s petition.

Keywords: Arbitration, Limitation Period, Contractual Dispute, Pre-arbitral Negotiations, Liquidated Damages

1. CASE DETAILS

1. INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case of B & T Ag versus Ministry of Defence centred around a contractual disagreement over a deal to buy 1,568 Sub Machine Guns via the Ministry of Defence’s Fast Track Procedure. The dispute arose when B & T AG filed arbitration procedures under Section 11(6) of the Arbitration and Conciliation Act of 1996. The Hon’ble Supreme Court’s primary concern in this case was the application of the limitation period for choosing an arbitrator and whether time spent in obligatory pre-arbitral consultations should be omitted from this period. The court decided on May 18, 2023, noting that such conversations do not toll the limitation period, emphasizing the need for rigorous respect to procedural timetables in arbitration procedures.

1. FACTS OF THE CASE

• The respondent i.e. Ministry of Defence issued a tender for the urgent procurement of 1,568 Sub Machine Guns under a Fast Track Procedure in 2009. After due negotiations the petitioner i.e. B & T AG signed the contract in 2012.
• In 2016 the parties’ disagreement originated from the respondent’s claimed unlawful encashment of the warranty bond. In consequence, the respondent took action of encashing the Liquidated Damages for the requisite amount i.e. Euro 201,793.75.
• The respondent also received the sanction from the President of India to deduct the amount of Euro 197,230.35 as recovery of LDs from the petitioner.
• Despite all this, both the petitioner and respondent continued to engage in bilateral discussions with the goal of settling the dispute. However, the respondent notified the petitioner that the action taken by the respondent was according to the terms & conditions of the contract. Despite that, the petitioner requested the respondent to reconsider the matter and to allow the petitioner to submit its case.
• On November 8, 2021, the petitioner appointed an arbitrator and requested the respondent to appoint the same. However, the respondent refused to do so. In consequence, on February 3, 2023, the petitioner filed an arbitration petition before the Supreme Court.

1. LEGAL ISSUES RAISED
2. Whether time-barred claims or claims barred by limitation can be said to be live claims, which can be referred to arbitration.
3. PETITIONER/ APPELLANT’S ARGUMENTS

• The counsels for Petitioner / Appellant submitted that counsels for Petitioner / Appellant submitted that the claims made by them are not time-barred.
• The counsel contended that the respondent wrongfully deducted the LDs.
• The parties were trying to amicably address the problems by way of bilateral discussions.
• The court specifically may consider Article 21.1 of the contract which reads as; all disputes or differences arising out of or in connection with the present Contract, including the one connected with the validity of the present Contract or any part thereof, shall be settled by bilateral discussions.”
• The respondent notified the petitioner for the first time on 22.09.2017, that the petitioner’s proposal to revisit the decision of improper deduction of LD had been refused.
• By referring to the Geo Miller case it was submitted that once the parties get involved in the bilateral discussions, the time does not play any role.
• The refusal to review the claimed improper deduction of the liquidated damages via letter dated 22.09.2017 might be deemed to be the breaking point.
• By excluding the COVID period, the date of notice of arbitration which is 08.11.2021 comes within the limitation period of three years.
• It is urged that the petition filed under Section 11(6) of the Act to form an Arbitral Tribunal be granted and formed.

1. RESPONDENT’S ARGUMENTS
   • The counsels for Respondent submitted that the counsels for Respondent submitted that the petition filed by the petitioner is time-barred.
   • Since the petitioner’s concern centres on the deduction of the LDs, the last such deduction was made on 26.09.2016, hence this matter might be the cause of action.
   • However, the notice for the arbitration was sent on 08.11.2021, which is significantly more than two years over the period of limitation of three years.
   • It is contended that the time of limitation for issuing a notification requesting arbitration which is not particularly stipulated in the Schedule to the Limitation Act 1963, shall be covered by the residuary Article, i.e. Article 137 of the said Schedule.
   • The petitioner’s claim is ex-facie time-barred, hence the current petition under Section 11(6) of the Act 1996 should be rejected.
2. RELATED LEGAL PROVISIONS
   • Arbitration and Conciliation Act 1996

Section 11(6) Inter alia the appointment of an arbitrator in the event of the parties failing to make such an appointment. It outlines the steps the parties may take to appoint an arbitrator in a dispute.

• Limitation Act 1963

Article 137 A residuary provision provides for a limitation period of three years from the date when the right to apply accrues, for any application for which no period of limitation is provided in any of the Articles in the Schedule to the Act.

1. JUDGEMENT
   1. RATIO DECIDENDI

After a thorough review of the relevant statutes, this court ruled that in circumstances where claims are time-barred, it may decline to issue a referral under Section 11 of the 1996 Act. The Act is intended to accelerate dispute settlement by including provisions for time-bound arbitral processes. Because the Act does not establish a time restriction for making an application under Section 11(6), recourse is made to the 1963 Act, as per Section 43 which applies the Limitation Act to arbitrations, similar to court procedures. In the lack of a particular Article in the Limitation Act, the residual provision of Article 137 applies with a three-year limitation term beginning with the accrual of the right to apply.

This Court’s decision, consistent with previous decisions and relevant High Court rulings, confirms that the application under Section 11 must be filed in a court of law, subject to a three-year limitation period beginning with the date of refusal to appoint the arbitrator or the expiration of 30 days, whichever comes first. In the same decision, the Hon’ble Supreme Court refers to Justice Bachawat’s book, Law of Arbitration, Chapter 37, p. 549, which notes that like actions, claims in arbitrations must be presented within a specific time once they arise.

The cause of arbitration arises when the claimant has the right to seek arbitration and the limitation period begins at the moment. The timely beginning is critical for justice and equity and the defaulting party should pay the penalties rather than transferring them to the other side.

• Three Year window for Section 11 application:

The Supreme Court clarified that the three-year window for submitting a Section 11 application begins on the day the initial cause of action arose. This means that the parties have a specific time within which to bring their claims under Section 11.

• Statute of Limitations and Negotiations:

The cause of action will not be postponed due to further negotiations between the parties. Even if negotiations are ongoing, the clock for the three-year limitation period starts ticking from the date of the initial cause of action.

• Determining the Breaking Point:

In cases where parties engage in serious negotiations, the court must establish the breaking point. The breaking point refers to the moment when serious attempts to resolve the dispute peacefully would have been abandoned.

• Exclusion of Negotiation Period:

The Geo Miller case ruled on excluding the negotiation from the computation of the limitation period for reference to arbitration. However, the Supreme Court two-judge bench decision in this case appears to have diluted the Geo Miller ruling. The B & T case acknowledges the Geo Miller observations but lacks specific details on the conditions for excluding the negotiation period from the limitation calculation.

1. OBITER DICTUM

In this case, the court highlighted the lack of a stated limitation term under Section 11 of the 1996 Act, prompting the application of Article 137 of the 1963 Limitation Act, which provides three years from the accrual of the right to apply. However, this court found it to be too lengthy and contrary to the Act’s goal of rapid dispute settlement. Amendments in 2015 and 2019 imposed time constraints, such as an 18-month deadline for completing procedures under Section 29A. Given the legislative objective and structure of the Act, this court encouraged parliament to modify Section 11 to create a precise restriction time for filing petitions for arbitrator appointments.

1. CONCLUSION & COMMENTS

The Supreme Court’s decision in the B & T AG vs Ministry of Defence case underscores the critical importance of adhering to contractually mandated pre-arbitral negotiation processes. The court’s ruling that mere negotiations do not extend the limitation period highlights the necessity for clear and timely initiation of arbitration proceedings. This decision serves as a pivotal reminder for the parties involved in contracts to meticulously follow procedural requirements to avoid forfeiting their right to arbitration.

1. REFERENCES
   1. Important Cases Referred
      • Geo Miller and Company Private Limited vs Chairman, Rajasthan Vidyut Utpadan Nigam Limited (2020 14 SCC 643)
      • Bharat Sanchar Nigam Limited & Another vs Nortel Networks India Private Limited (2021 5 SCC 738)
   2. Important Statutes Referred

• Arbitration and Conciliation Act 1996
• Limitation Act 1963